"We're based in western Sydney with huge potential and we know the impact of the work we do is very direct, however it's a challenge to increase our income from non-government sources to further our reach within the region."

The Bankstown-based arts company missed out on its latest application to the Australia Council for $20,000 to help fund part of a three-year multi-disciplinary project placing artists in residence with small businesses.

More than 90 grants will be cut to five broad categories next year as part of an effort to reduce the volume and complexity of paperwork required for a funding application, which has long been a gripe for artists and arts organisations.

Big hArt, a Sydney theatre company that works with marginalised people, famously rejected a $750,000 grant from the Australia Council in 2008 because of the enormous cost of processing the grant, which it estimated to be $165,000.

The details were contained in a glossy eight-page brochure widely-regarded as full of motherhood statements about ambition and excellence but short on substance.

Arts Minister George Brandis and Foreign Affairs Minister Julie Bishop both attended the launch of the Australia Council's five-year strategic plan, A culturally ambitious nation, at the Sydney Opera House on Monday.

In the wake of the controversy, Senator Brandis suggested arts organisations that refused private funding should not receive money from the public purse.

Despite its largesse, the national arts funding body has often attracted controversy for pursuing a political agenda, being overly bureaucratic and nepotistic, and promoting mediocre artists and bad art.

"The decision reflects poorly upon the Australia Council and its judgement, that the organisation should lend its name to the promotion of unlawful behaviour," said then Immigration Minister Philip Ruddock.

At Monday's launch, Senator Brandis noted that public arts funding enjoyed bipartisan support. But Chris Berg, a research fellow with the Institute of Public Affairs, argues: "I don't think we should be supporting artists through taxpayer funding."

In a purely free market system, Berg said artists would create works to find an audience or at least a private patron to support their practice.

Yet even accomplished artists receive public funds - lead singer of The Drones, Gareth Liddiard, won a $90,000 music fellowship in 2011 to work on two new albums; while successful author and academic, Linda Jaivin, was awarded $40,000 in 2007-8.

Berg said the Australia Council distorts the production of culture by encouraging artists to market themselves to bureaucrats through the grants application process instead of appealing to cultural consumers.

"When right-wing think tanks talk about this, they overlook certain fundamental facts," said broadcaster Phillip Adams, who sat on the film and television board in the early-1970s.

Adams said the free market had failed to support cultural production in Australia before the arts funding body was set up.

"It was just a terrible silence across the land," he said. "Within a year of the Australia Council setting up there were probably more Australian plays in a week than in the previous decade and the film industry as you know was booming.

"It was like rain after a drought. Suddenly there was an explosion of growth."